Govt proposes Rp 6t for setting up insurance deposit body

Govt proposes Rp 6t for setting up insurance deposit body

Urip Hudiono, The Jakarta Post, Jakarta

The government has proposed to the House of Representatives a Rp
6 trillion (US$642 million) budget for the establishment of the
Insurance Deposit Agency (LPS), which will implement the
government's future blanket guarantee on bank liabilities.

Speaking on Thursday during a hearing with House Commission XI
for financial affairs, the Ministry of Finance's director general
for financial institutions, Darmin Nasution, said the money
would cover the agency's financial needs in its initial operating
year and help it implement the blanket guarantee scheme.

"The LPS needs an initial setup fund of between Rp 4 trillion
and Rp 8 trillion, but Rp 6 trillion would be optimum," he said.

Darmin said if the LPS received Rp 4 trillion in initial setup
funds, the agency would experience a deficit of some Rp 75
billion in its first year.

He said the LPS would need some 21 years to accumulate
sufficient reserves to covering third-party liabilities at the
country's banks, which as of last year amounted to Rp 963.1
trillion.

With Rp 6 trillion, the LPS would already have a reserve of
some Rp 75 billion and would only need some 19 years to reach a
sufficient blanket guarantee reserve.

"Such an initial fund would therefore make the LPS strong
enough to gain the trust of the public and the country's banking
industry," he said.

The money itself, Darmin said, would come from a government
account at the central bank, which currently holds Rp 9.7
trillion in cash reserves the government has been using for its
existing blanket guarantee program.

Upon its establishment, the LPS will also charge all banks an
annual flat premium fee of 0.2 percent of third-party funds.
Currently, the premium fee is 0.25 percent, which generates some
Rp 2 trillion annually.

Law No. 24/2004 on the LPS will take effect this Sept. 22. The
law stipulates the establishment of the agency and the eventual
phasing out of the government's existing blanket guarantee
program for all savings and deposit accounts.

Starting March 22, 2006, the LPS will only guarantee accounts
amounting to Rp 5 billion, which will be reduced to Rp 1 billion
on Sept. 22, 2006, and Rp 100 million on March 22, 2007.

House Commission XI chairman Paskah Suzetta said the
commission in principle agreed with the government's argument for
LPS' Rp 6 trillion initial setup fund, but would hold another
hearing on Monday before reaching a decision.

The government introduced its costly blanket guarantee scheme
when depositors rushed banks to withdraw their money during the
1997-1998 Asian financial crisis.

Although the scheme helped to restore the public's trust in
banks, it put a strain on the cash-strapped government. Many
experts have also said it tends to encourage bankers to neglect
prudent banking practices, because they know the government will
cover their liabilities should their banks go under.